U.S. jobs show signs of slowing, but unemployment rate is back down to 3.6%
A weaker-than-generally-expected jobs report took some of the wind out of the sails of recent market moves, but the labour market remains too tight for the Fed to relax.
A July rate hike is imminent, but labour market data is the strongest lagging indicator, and weaker inflation next week may temper expectations for a rate hike in the future.
Jobs fall short of expectations
The U.S. jobs report for June fell short of expectations in most aspects, but that will not change the outlook for another rate hike at the July 26 FOMC meeting.
Nonfarm payrolls rose 209,000 in June, with a downward revision of 110,000 for the previous two months. Consensus forecasts were for an increase of 230,000, but the ‘whisper’ number was closer to 300,000, according to yesterday’s figures from ADP and the service sector employment index from ISM, so yesterday’s market moves that sent Treasury yields soaring and interest rate expectations soaring have in some ways reversed.
Weakest private sector job growth since December 2020
Private sector payrolls rose by only 149,000 instead of the expected 200,000, the biggest surprise in the report, as manufacturing increased by 7,000, construction by 23,000, and private services by only 120,000.
Education/Health continues to be very strong in this component with an increase of 73k. However, retail trade employment fell by 11k, while transportation and warehousing employment fell by 7k, indicating that the love affair with material goods continues to wane.
Leisure and hospitality employment has now increased by 26,000 or less for three months in a row, contradicting many claims of robust growth in this sector, primarily due to strong travel numbers.
Rather, it coincides with figures from Opentable and STR, which point to year-over-year declines in restaurant demand and hotel occupancy. The government continues to hire diligently, with 60,000 new positions.
Areas of strength that make the Fed cautious
Wage numbers (0.4% month-over-month vs. 0.3% consensus) were stronger and revised upward, implying that the annual wage inflation rate will remain at 4.4%, not fall to 4.2% as expected.
The unemployment rate also declined to 3.6% after rising to 3.7% in May from 3.4%. The household survey showed an increase in employment of 273,000, while the number of people classifying themselves as unemployed fell by 140,000. Average weekly working hours also increased slightly to 34.4 hours.
Jobs are a lagging indicator
Today’s data takes some of the wind out of the sails of rate hike expectations, but 209,000 jobs is still a lot, and with wages continuing to rise and unemployment falling, it should bolster the case for a July rate hike.
Importantly, labour market data is the laggard of all lagging indicators, so it tells us nothing about the future.
Much more important in this regard are lending conditions, business sentiment indicators, and new orders surveys – note that the leading indicator has fallen for 14 consecutive months.
Yesterday’s National Federation of Independent Business survey of hiring intentions showed that only 15% of small businesses expect to hire in the next few months, down from an average of more than 20% last year.
Article based on a story from ING Bank as copyright owner